Guide to Setting up a Business

What goes into getting a business license?

Local government controls the issuance of a business license within its territory. The business license has several purposes, including regulation, accountability, and taxation. This article give a brief overview of what to expect when filing for a business license.

 

Business License Overview

Nearly all cities and counties require that a business obtain a business license prior to carrying on business or commercial activity within its territory. There are also a litany of federally regulated businesses. For a list of federally regulated industries and associated laws, see Business Permits and Associate Licenses from the SBA. This article focuses on the local requirements for obtaining a business permit.

 

Purpose

Business licenses have a variety of purposes. Most importantly, a license is are a form of city or county tax that goes to provide government support and services. Likewise, the permit allows the government to regulate and account for business activity within its territory.

 

Authority

Local government has the authority granted by the state constitution (taxing power) to require a license to carry on business activity.

 

General Requirements for a Business Permit

As is the case with any administrative filing, a business permit generally requires a laundry list of information and documents. The most common types of information required for issuance of a permit are as follows:

• Written Application This will be a government authorized form. Submitting the application requires proof of identification at the time of filing.
• Business name If you plan to conduct business as a sole proprietor, then you can list your personal name as the name of the business. If you have have a business entity (such as an LLC or Corporation) you will have to produce evidence of your incorporation within the state. If you carry on business as a sole proprietor or as a partnership under a business name, you will have to produce proof of a fictitious name filing. Depending on your jurisdiction, you either file at the local courthouse or with the secretary of states office. The fictitious name filing gives notice to the public of the nature and owners of the business.
• Statement of purpose You must supply a statement of purpose that indicates the type or nature of the business you hope to conduct. Your business activity will generally be categorized (with a code) into some form of previously recognized business activity.
• Proof of License for Specialized Activity If you conduct any sort of activity that requires a Federal, State, or Professional license, then the local agency will require proof of license.
• Location of Business You will obviously have to identify the location of your business. The important thing to remember is that you should verify the area zoning ahead of time. Regardless, the agency will conduct zoning verification. In some cases the agency may require proof or ownership or control (rental) of the identified location.
• Proof of Sewage and Waste Service You may be required to provide proof of sanitation services at the listed location. Generally, a copy of the locations sanitation bill statement is sufficient.
• Filing and Associated Fees Each locality is different in their filing and other fees. There may be a fixed fee for filing. Further, there may be an annual fee based on the percentage of income produced from operations throughout a fiscal year.

Other Permits

Other permits, such as Environmental inspection, Health Inspection permit, fire department permit, and state occupation licenses (ex., liquor license)may apply.

 

Maintaining a Business License

Below is a list of recommendation for maintaing compliance and legality of your business operations.

• Make certain you renew your business license on or before the annual deadline. Failure to do so could result in revocation or additional license fees. Operating without a valid license could lead to a significant fine.
• Maintain a copy of all records relating to filing for your business permit or paying your permit fees.
• Make certain that you display your business license within your place of business in accordance with local requirements.
• If you expand your services or alter the nature of your business you will need to update your business license. Depending not he jurisdiction, this may require an completely new application.

 

Conclusion: Preparing ahead of time before applying for a business application can save significant time and effort.

Employer Identification Numbers (EIN) Explained

The employer identification number is the method by which businesses transmit tax information to the State and Federal Governments. The FEIN is issued by the Internal Revenue Service (IRS). Your States Department of Revenue may use the same number (State EIN) or issue a similar identification number.

A Little More or Employer Identification Numbers

The Employer Identification Number (EIN) is used to identify the business entity or employer in the country. You can think of it as a Social Security Number (SSN) (which is issued to check the identity of residents of USA) but for businesses. The Federal EIN is issued by Internal Revenue Service (IRS) which is nine digit unique codes and it reflects where does the employer or business entity exist and register.

Businesses generally obtain an EIN at the time of filing for business entity status in the state. They either visit the IRS website or call or fax the IRS. If you want to change your business entity status, you must petition for a new EIN. The individuals will reach out to the state taxing authority to acquire a state EIN once the Federal EIN is issued.
An Employer Identification Number is required for all forms of business including sole proprietorship, partnership, private companies, trust and public ltd companies. A sole proprietorship without employees may file taxes under the business owners social security number. The EIN becomes mandatory when the business acquires employees and is required to withhold payroll taxes on those individuals.

Without an EIN, the business cannot legally pay (or without payroll taxes) their employees, nor can they file income tax returns. Furthermore, a business without an EIN cannot open an account with bank or brokerage house.

Note: Obtaining a business EIN is also important for Establishing Business Credit.

References for Employer Identification Number

https://www.investopedia.com/terms/e/employer-identification-number.asp
https://www.irs.gov/businesses/small-businesses-self…/employer-id-numbers
https://investinganswers.com/financial…/employer-identification-number-ein-5967

 

Note: Obtaining a business EIN is also important for Establishing Business Credit.

What are Sales Tax Licenses and Numbers?

A state issued license and identification number for businesses collecting sales tax. If you sell certain types of goods, your state likely requires that you collect sales tax from the purchasing customer. A business must generally collect sales tax on any tangible item sold. Rental of consumer goods, storage, use of personal property, and certain services may also be covered.

 

Sales Tax

Sales tax is an amount of state tax paid by the consumer when purchasing a good in a particular state. Any business that sells tangible goods must have a sales tax number before opening. The States Department of Revenue generally issues the numbers along with instructions for collection of tax and remittance to the treasury. Remember, sales tax must be paid by the customer and not the business. It must be remitted to the State on a monthly basis, with a few exceptions for certain types of businesses.

 

Use Tax

Use tax is a tax on goods that are purchased in another state (at a tax free or lower tax rate) and used, consumed, stored, etc. (but not for resale) in the taxing state. If the goods are sold in the state there is an applicable value-added tax that may be assessed. The amount of the Use Tax is normally the same as the state sales tax. However, when the good is purchased in another state with a lower sales tax, the state of use charges a use tax equal to the difference between the sales tax in the state of use and the sales tax in the state of purchase. The purpose of the use tax is to disincentivize buying goods in another state, simply because there is lower applicable sales tax.

 

Sales Tax Licenses and Numbers

If you sell a product your state will require a sales tax number. This is because all sellers of products are required to collect sales tax on the item from the individual purchasing the item. This is true even if your state does not collect or charge sales tax on goods sold. The sales tax number is part of the system used by the state to track sellers of goods (merchants). It allows merchants to report and deposit the sales taxes withheld to the state each month. The state treasury department generally regulates the charging and collection of sales tax.

Note: Some states require the collection of sales tax on other activities, such as rental activity. Research you own states requirements for sales tax withholdings and numbers.

Protecting a Business Name

A business name is a form of intellectual property. The rights in a business name are recognized under state and federal law. You can register your name at the state level or protect your business name via trademark rights under state and federal law.

 

Register Business With the State

You will need to make sure that the business name you plan to use is not already being used by another business. You will need to conduct a search at the state and federal level.

At the state level, the first step is to go to your Secretary of States website and do a search for business names. (Note: Sole proprietors or partners conduct business under a trade name may file a fictitious business name at the local county office or courthouse). If the business name is not yet registered by another business, you can reserve it for a statutory period of time (usually 120 days). If you are ready to register your business, you can elect the business name and file your business organization documents at the same time.

The problem arises when the name is already in use by another business entity that is registered to do business within the state. If this is the case, the state will not allow you to register for that business name or any name that is deceptively similar to another business name.

Note: Registering a business name within your state does not preserve the name for use in other states. (See Trademarking a Business Name)

Verify Availability of the Business Name Under Federal Trademark Law

At the federal level, you need to make certain that the name of the business is not trademarked. Note, you can trademark certain combinations of words or visual images depicting words. In either case, you will want to do a search on the U.S. Patent and Trademark Offices website to make certain that your desired name is not trademarked.
Sometimes a name will be used in conducting business within an area, but will not be registered. It is important to do an internet search to determine if the business name is already being used. The original user of the business name may have common law rights in the name, even if the name is not registered with the state or local government. This is a form of local (statewide) protection.

 

Trademark Your Name

As noted above, simply using an available business name as part of your commercial activity is sufficient to secure state, common law rights in the business name. This is a very weak form of protection, as it only protects the business name within areas where the business operates or actively engages customers or clients. Another business could use the business name in regions where the original business does not carry on activity. Using a business name in a region effectively locks others out by preventing the use of a like business name in the region. In order to receive national rights in a trademarked name, the business must register the trademark federally.
The best way to protect the use of your business name throughout the United States is by filing the name with the U.S. Patent and Trademark Office (USPTO). Trademark law allows individuals and business to trademark certain words or word combinations and images (which may include words). In order to trademark your name you will need to conduct a search for availability on the USPTO website, via the Trademark Electronic Search System (TESS). This search engine will search many known databases to determine if the name has been trademarked in some other fashion. While this database is very thorough, it is not entirely complete. If you attempt to trademark your name, a trademark attorney working for the USPTO will do a diligent search across the United States to make certain that the name is not in use in other areas. If the name is being used commercially in a certain area, the name has common law protection. Therefore, you may not be able to register the name federally. In that case, you are left with the option of registering the name in any state in which you do business and it is available (not already registered).

Note: You do not have to use a TM symbol to protect the rights. Putting the TM symbol gives third parties notice of assertion of trademark rights. Once a trademark is federally registered, the business may employ the R symbol to demonstrate that the business name is a federally registered trademark.

Website URL and Social Medial Outlets

Many people often forget to determine if the name of your business is available for a custom URL (E.g., http://TheBusinessProfessor.com). .com is the most popular type of URL. .net and .org are also extremely popular. Government and educational organizations often use .gov or .edu. You can go to any hosting provider (such as GoDaddy) and check the availability of the website address. If the website is already registered, your options may be to use a different domain name or seek to purchase the domain name from the owner. May people purchase domain names in bulk in hopes of later selling the name for a profit.

As indicated for website URLs, it is important to go ahead and register your social media names before they are taken. For example, you will want to obtain www.facebook.com/(YourBusinessName). Twitter is becoming an increasingly popular outlet, so you may want to go ahead and establish your custom twitter handle (e.g., @jmgordonlaw).

Conclusion: Selecting an appropriate business name is an important step in the formation of your business. However, you have to make certain that your intended name. If it is available, then you should take steps to protect it from encroachment via multiple outlets.

Forming a Business Entity

Undertaking the mechanical steps to form a business entity is quite simple. In fact, the process can be completed in a matter of minutes through most State Secretaries of States websites. Commercial services, such as LegalZoom and RocketLawyer, charge fees to assist with this very simple process.

Forming a business entity, however, is more that simply undertaking these mechanical steps. Generally, it entails making a well-informed decision when selecting the type of business entity and then structuring the ownership and control provisions to reflect the understandings of the parties. This process is why it is valuable to consult with or hire an attorney when undertaking this process.

 

Choosing the Correct Business Entity

In our Legal Resources Library, we discuss the various considerations for choosing a business entity. In summary, these considerations are:

• Creation and Maintenance Requirements of the Entity
• Continuity and Fiduciary Duties within the Entity
• Control Provisions for Owners
• Ownership and Compensation Structure
• Limited Personal Liability and Risk Planning
• Business Funding Considerations (Debt, Equity, Property Transfers)
• Taxation (Salary, Profits, Self-Employment Tax, Gains on Asset Transactions)

These considerations, particularly the ownership structure and tax consequences of a particular business entity, can be quite complicated. In this regard, hiring an accountant and attorney who are specialized in small business taxation issues for new companies is invaluable.

 

Forming the Business Entity

The most common forms of business entity are as follows:

• Sole Proprietorship
• General Partnership
• Limited Partnership
• Limited Liability Partnership
• Limited Liability Company
• Corporation with S – Election (S-Corp)
• Corporation with C – Election (C-Corp)

The sole proprietorship and partnership do not require formal filing with the Secretary of State. These entities arise by default. That is, they arise by simply carrying on a business activity for an intended profit. While the sole proprietorship involves a sole business owner, the partnership regards the association of two or more individuals. The other types of business entity require a formal filing with the secretary of States Office. All Secretary of States websites allow for the filing of entity registration documents via the website.

 

The information required to file a business entity is as follows:

• Business Name
• Business Purpose (often not required)
• Place of Business (Your headquarters where records are maintained)
• Registered Agent (Individual and address responsible for receiving correspondences)
• Business Organizer (Individual filing the registration statement)
• Filing Fee (Anywhere from $50 – $500, depending upon the state, paid annually. )

As shown above, the process of filing the registration is simple. The difficult portion is to construct ownership and control documents for the business entity (e.g., partnership agreements, operating agreements, bylaws, shareholder agreements). These additional documents control the daily operations, structure, and governance of the business. I strongly recommend consulting with an experience attorney in constructing these documents.

 

Where to File & Doing Business in Multiple States

Most businesses will incorporate in the state where the headquarters is located. That is, small business owners will incorporate in the state where they live and begin carrying on business. Some businesses that intend to grow rapidly and seek outside investors will incorporate in Delaware. You can read more about reasons for incorporating in Delaware in our Legal Resources Library.

Incorporating in one state does not prevent a business from carrying on business in another state; however, you must file what is called a foreign company registration in any other states where you carry on business activity. This process is more simple than filing the registration statement. Basically, you provide the same information from your original registration statement to the state where you intend to do business. This can be done through the relevant states Secretary of States website. There is generally an annual filing fee of $50 – $500 for the foreign state.

When doing business in multiple states, you will be subject to the state taxation requirements of that state. Basically, you pay the state required taxes on income earned from business activity carried on in that state. See our Legal Resources text for more information on tax liabilities for doing business in multiple states.

Overview

The organizational documents of a business generally include the documents used to form or organize the business (registration documents) and the operational documents used to control activity within the business (operational documents).

The organizational documents are known as the declaration of partnership for partnership; the articles of organization for LLCs; and the articles of incorporation for the corporation. The filing of these documents to form the business entity is discussed in Overview of Forming a Business Entity and within the Startup Legal Resources Library.

This lecture focuses on identifying the operational documents that control the internal operations of the business.

 

Operational Documents

Operational Documents contains provisions regarding the percentage of ownership of each owner, the role of each owner in the business operations, and the authority of each owner to make decision and bind the business. Whenever a business has more than one owner and no ownership agreement in place, then state law controls. In most situations, the default rules call for equal ownership, equal control, and equal profit/loss sharing between owners. While this may be the owners’ intent, it is still advisable to have a thorough ownership agreement to address the litany of issues that can arise during the life cycle of the business.

 

Ownership and Control Rights

The ownership and control of a business generally begins with an agreement between the owners founders and managers. Ownership agreements generally outline:

• Control of the entity (or authority to act on behalf of the entity in carrying on business),
• Percentage of entity ownership,
• Entitlement to profits and responsibility for losses.

Each type of business entity has a different operating, management, and ownership structure. The business ownership agreement that you employ depends on the entity you choose to operate your business or venture. After selecting a business entity, each of the above consideration arise in drafting the ownership agreements.

 

Sole Proprietorship (No Formal Document)

A sole proprietorship is a company with only one owner. Therefor there is generally no issue of control or ownership of the business operations. Starting the sole proprietorship requires no paperwork. It is not registered with the state, unlike a limited liability companies (LLC) or corporations. As such, there is no legal requirement to file any formal document in place. All you do to create a sole proprietorship is simply go into business. No ownership agreement is required, so the business plan often serves as a guide for planning operations.

 

Partnership Agreement (PA)

The PA should outline the control of each partner of the business, the partner’s ownership interest, and the duties and responsibilities of the partners. Below are the important aspects to address within the PA.

• Governance Outlines rules governing the business
• Relationships Establishes an understanding of the business relationship that exists between the partners.
• Duties and Responsibilities – The regards the position that each partner will assume in the business operations
• Profits – Rights to or allocation of benefits or profits.
• Dispute Resolution It serves as a base to deal with problems that arise in carrying on business.
• Leaving the Partnership Determines the procedures and rights for when a partner leaves the business.

Without a PA, the default state law rules for Partnership operations apply. With this in mind, It is always better to have a planned, customized partnership agreement in place that meets the needs of the individual partnership.

 

LLC Operating Agreements (OA)

Individual state law determines whether an LLC is required to write out an operating agreement. (See your state Code of Laws).

The purpose and elements of an OA are as follows:

• Ownership Lays out ownership percentage and the profit and loss sharing between between the members.
• Authority Duties, obligations, voting rights, etc.
• Managerial structures & Governance (i.e., Member-managed or manager-managed. Rules for meetings and voting.
• Decision making Procedures for decision-making about the business
• Exiting the Business What will happen in the event that one of the owners decides to leave the business.
• Disputes Avoid or alleviate misunderstandings between members.
• Default Rules State laws control by default without an OA in place.

Corporate ByLaws

A corporation must file articles of incorporation (formation) and ByLaws (Operations). It may but is not required to file a shareholders agreement (Ownership). The purpose of the corporate bylaws is to lay out the operating procedures that the corporation. At a minimum, a corporation’s bylaws will cover:

• Name, address, and principal place of business
• Directors and corporate officers
• Election or appointment procedure
• Terms of Service
• Stock (number of shares and classes) that the corporation is authorized to issue.
• Governance Procedures:
• Director and shareholder (s/h) meetings
• Shareholder, director, executive actions
• Corporate record-keeping
• Amending articles of incorporation and bylaws.

Corporate Shareholders Agreement (SA)

The SA is an agreement among the shareholders (owners) of the company regarding their ownership interest. These are consensual and are usually formed to serve a particular purpose or settle an issue. The SA is not generally publicly filed (unless the terms or content mandate disclosure to investors). Elements: A SA will vary depending on the purpose, but common provisions in a SA are:

• Who can be a shareholder;
• Procedure if the shareholders leaves, dies, or is fired;
• Who can serve on the board of directors;
• Management of the company;
• How the company should be operated
• Shareholders’ rights and obligations;
• Information on the regulation of the s/hs relationship.
• Ownership of Shares – privileges and rights of shareholders;
• Valuation of the stock for internal purposes;
• Entitlement or obligation to repurchase shares;
• Procedure for the repurchase of shares.

Additional Information

Regardless of the type of entity you choose for your business, it is advisable to have an ownership agreement in place. We cover ownership agreements in greater detail in the Startup Legal Resources Library

What are the business licenses and permits that a business may need?

Several licenses apply generally to all startup businesses. Below is an explanation of several of the more common licenses and permits that accompany starting a business. The licenses are listed in a general order of priority. Different states, localities, and professional licensing agencies may requires additional licenses or permits before carrying on business operations. Use this list as a baseline for researching what types of licenses are required in your area to conduct your business activity.

 

Professional & Occupational Licenses

Professional or occupational licenses apply to specific industries. For example, if you are going to operate an accounting firm, you have to be a certified public accountant. This same principle applies in a number of professions, such as: Law, Medicine, Engineering & Architecture, Real Estate, Accounting & Tax Services, Insurance, etc. Likewise, the state or federal government may regulate certain types of products you sell or services you provide, such as Alcohol, Tobacco, Firearms, Pharmaceuticals, Investment Services (Securities), Food, Media, Transportation, etc. The type of license required will vary by state, so do your research into your individual state requirements. Generally, the State Secretary of States website will provide a list of occupational licenses required by the State prior to carrying on a given business activity. It may give a list of required federal permits as well.
Example: The state and federal government may require permits for sales of food items.

 

Business Licenses

The next step in setting up a business is obtaining permission to form a business from the locality where you intend to operate. Licenses are granted from either the city or the county, depending on your location. Generally, you will need to apply for a business license in every locality in which you operate. (See our article, Business Licenses Good Info for more information).

 

Zoning and Property Use Permits

In order to obtain a business license for a given location, you will need to make certain that the land is either zoned for the business activity or you must receive a land use permit to carry on that type of activity. You can obtain a land use permit from the local government, generally at the zoning department. (See our article, Zoning Regulations Overview for more information.)

 

Building Permits & Certificate of Occupancy

Now that you have your occupational licenses, your business license for an appropriately zoned area, now you need to build your business. If you are building a new building you will need to have architectural plans for the construction approved. You will have to file these documents with the local agency responsible for building permits. You will also have to make these filings if you are planning on building out your operations, expanding or carrying on construction to the building where you plan to carryon operations.
Whenever you are constructing or moving into a new building, you will need to apply to the local zoning commission for a certificate of occupancy prior to starting business. Generally, the building inspector will come out and inspect the building to make certain it meets zoning requirements, building codes, fire hazard standards, and other local regulations.

 

Fictitious Business Name Filing

Many people carry on business as sole proprietors or as partners. This means that they likely are not registered with the secretary of states office. If your decide to carry on business under a business name that is different from the name of the sole proprietor or partners, you will need to register that business name with the local government. Generally, this is done by making a Fictitious Business Name filing or Doing Business As filing with the local government or at the local courthouse. The reason for this rule is to prevent individuals from concealing their true identity from the public by carrying on business under a business name.

 

Conclusion: The licenses and permits are absolute necessities for starting up a new business. Failure to comply with federal, state, or local regulations in this regard can lead to criminal or civil liability.

Choosing a Building or Location

Below are a list of factors that you should explore when choosing a location to establish your business.

• Assess needs of business:
  • type of building (building specs),
  • operational needs,
  • branding needs,
  • financial limitations,
  • etc.
• Zoning
• Sufficiency of office, building, facility:
  • build out,
  • parking,
  • storage,
  • state of repair,
  • expansion ability,
  • lighting, HVAC, electrical, communications internet/phones,
  • security,
  • etc.
• Costs
  • renting or purchase,
  • utilities,
  • tax rates & incentives,
  • Employee wage rates,
  • other expenses,
  • etc.
• Is the area accessible to customers?
  • walk-ways,
  • public transit,
  • traffic density and flow,
  • safety,
  • etc.
• Are there complimentary businesses (or competitors) in the area?
• Is the location operationally efficient:
  • shipping,
  • deliveries,
  • available workers,
  • parking customer/employee,
  • etc.?
• Does the location fit the business brand or image?
• Landlord characteristics:
  • attitude,
  • willingness to negotiate the lease,
  • etc.

Renting vs. Purchasing

The decision to rent or purchase a location to conduct business depends on numerous factors. These factors generally regard the adequacy and availability of suitable properties. When a business has the option to rent or purchase an adequate property, it is important to understand the advantages associated with each decision.

Advantages of Purchase

• Flexibility in use of property;
• Property appreciation;
• Long-term, cost savings;
• Secured asset for future borrowing;
• Tax deduction for interest expenses; and
• Tax deduction of property tax costs.

Advantages of Renting

• Increased mobility;
• Lesser maintenance responsibility for property;
• No exposure to property value fluctuation;
• Generally no property taxes,
• Tax deductions for rent payments; and
• Lower upfront capital costs.

Math of the Rent vs. Purchase Decision

When determining whether to rent or purchase a property, there is often a better financial option depending on the cash flow needs of the business. There are several things you need to know when doing a comparative calculation.

1: What is the required rental down payment vs. Down payment, closing & finance costs? Your business may not have the available cash on hand to meet one of these amounts. On commercial spaces, most purchasers must put down between 10-30% of the purchase price. A commercial lease, on the other hand, generally requires a first and last month rental down payment.

2. How much is the monthly payment amount on a lease vs. Mortgage? Leases payments are generally certain. Mortgages, however, include additional maintenance costs, property taxes, etc. Remember, this is just a preliminary number and does not accurately demonstrate the effect of leasing or purchasing on the bottom line.

3. What is my real cost of capital associated with each rent or mortgage payment? A mortgage payment is not deductible against income tax liability. Only the interest paid (or points at closing) on the mortgage payment can be deducted. You will calculate the tax effect on the business (or individuals in a pass-through taxation entity). Depending on the applicable tax rate of the organization or individual(s), the effect of deducting the interest payment will vary. In a lease, on the other hand, the entire amount of rent is deductible. If an organization (or individual owners in a pass-through tax entity) has a high tax rate, then deducting the lease payments will have a larger effect.

4. What is the projections for capital appreciation of the property? This information will tell you what you can expect to recover on a mortgage. You will need to compare the lost income from employing the down payment in other investments. You will then compare this to the amount expected to be recovered on the property. You will do a time value of money calculation to determine the commensurate values:

Example: You will purchase the land for $100K, with $20K down payment and $80K payments. The payments on the $80K are $500 per month ($50 of which is interest). The rental payments on the same property is $650 per month. You will first determine the tax benefits of expensing the $650 of rent vs $50 in interest. This will put the amounts closer together. Then you will calculate the the expected future sale price of the business. You will deduct the taxes on any gains. Now, you will reduce this amount by the future value of the $20K that you put down up front. Calculate this as follows $20K (1 + Interest Rate)^N

The Interest Rate equals the rate of return on a relatively secure investment, such as the S&P. (Ex. 7%)

N equals the number of years until you expect to sell the property.

This will give you the true value of what you expect as a return for holding the property that amount of time.

Conclusion

The above example is an overly simplified example of how you will calculate the value of purchasing vs renting. The real numbers or costs associated with each can get quite complicated. As a general rule, purchasing is generally a better long-term decision. If, however, there is a need to immediately preserve cash, then purchasing may not be an option.

What should entrepreneurs know about zoning regulations?

Zoning regulations determine the type of commercial activity you can carry on in a given area or locality. One of the earliest decisions in the life of a startup is, where do I start my business? The answer may be as simple as walking out to your garage or you may need to rent commercial space in a strategic location. In either case, you will have to investigate the zoning designation of your anticipated location of operation. The land may be zoned in a manner that does not allow your type of business, or any type of business, on that piece of land.

Overview of Zoning

Zoning is the designation that your local town or municipality gives to land within its legal authority. Zoning is carried out by a board or administrative agency that makes determinations, after following legal protocol, about the appropriate potential uses of certain pieces of property. The zoning board will generally publish a regulatory guide of the zoning process within that municipality.

 

Zoning Designations and Permitted Uses

Zoning designations regulate land by its permitted uses (the activity that an individual or business may conduct on the land) or limits certain characteristics (height, width, color, building material) of the type of building that can be built on the land. The types of land designations and their permitted uses are as follows: residential, mixed residential-commercial, commercial, industrial and special (e. g. Utilities or power production, event venues, airports, etc.). The zoning will generally have several sub-categories. Each city or municipality has its own zoning regulations. You should contact your local municipal government office to obtain a record of the local zoning regulations.

Local regulations for businesses often restrict the business operations in the following ways:

• The number of employees that the business can employ at the location.
• The amount of in-coming and out-going traffic that the business can allow or cause within the area. This can greatly hamper business operations by affecting the shipment or delivery of goods or supplies to or from the business.
• Business signage and utility usage.

The important thing to remember is that, if the zoning board zones a particular area in a certain way, individuals or businesses cannot carry on activity within that specific area.

 

Zoning Procedures

The procedures for zoning are codified in state codes, which regulate or set the standard that local governments must following in carrying out zoning regulation. At a bare minimum, due process requires that the local government give public notification and opportunity to comment on the intended zoning designations of land. Giving notice generally comes in the form of public notice is a state sanctioned newspaper, posting on the administrative website, and physically posting notice on the subject property. Residents will have the opportunity to submit written opinion regarding the zoning of the land. Depending on the situation, a local resident may have the opportunity to present a verbal opinion before the zoning commission.
This begs the question of what happens if land is re-zoned after a business begins activity? Generally, a business (or rather its owners) has certain constitutionally protected rights. If the Government changes the zoning designation in a manner that halts the business operations, then this may constitute a taking by the government. Under the Takings Clause of the US Constitution, the local Government will have to show a specific government purpose (for the good of the general public) for the taking and pay just compensation to the owner.

 

Variances to Zoning Regulations

If a location is zoned in a manner adverse to an individual or business, then the individual resident or business may request a variance from the local zoning board. A variance is a type of permission to conduct a specific activity on designated property without rezoning the land. These regulations are broadly worded to allow for judicial interpretation in a case challenging a use, which comes before a court. Case law for your state would outline the factors that a court would consider in determining whether there is a violation of the local regulations.
Conclusion: When starting a business you must determine the areas that are zoned appropriately for your type of business. Once you have designed these areas, this will help narrow down the considerations for business locations.

Private Restrictions on Land Usage

Land use restrictions, other than zoning, may further affect the ability to carry on business at a given location. Two popular forms of private restrictions are covenants and easements.

Covenants

Covenants are contractual provision that create legal restrictions. In the current context, covenants may prohibit the use of land for certain activity or prohibit certain activity on the land. These often arise in a land sale contract or homeowners association agreements.

Easements

An easement is a legal ownership right in land. It allows the owner of the easement to use the land for a limited purpose, such as ingress or egress of property. The land subject to an easement cannot be used in a manner that interferes with the easement owners rights. This can prevent the use of the land in many ways, such as the construction of building or fences. Another form of easement that is similar to a covenant is a negative easement. This is a restriction on the use of land reserved by the transferring party at the time of transfer. The easement specifically prohibits certain types of conduct on the subject property.

Business Insurance Considerations

Below is a list of types of business insurance. Business owners must be aware of each of these types of insurance and do a cost/benefit analysis for acquiring each type.

Business Owners Policy

Coverage for Property Loss

Protection from Liability

Business Continuation (Interruption) Insurance

Product Liability Insurance

Malpractice Insurance

Vehicle Insurance

Workers Compensation Insurance

Unemployment Insurance

Employment Practice Liability Insurance

Director and Officer Liability Insurance

Disability Insurance

Life Insurance

Health Insurance

Employee Fidelity Bonds

Performance Bonds (Contractors Performance)

Payment Bonds (Pay Sub-Contractors)

Establishing a Business Bank Account

It is important to establish a business bank account for a number of reasons. Foremost among those reasons is the separation of personal and business assets. Failure to do so can lead to loss of personal liability protection in some entities. Below are the documents necessary to take with you when meeting with an account manager to set up a business bank account.

 

Business Entity Documents

You will need your business entity documents. If you are not a registered business entity (i.e., a sole proprietorship or partnership) and you are doing business under something other than your name, you will need a doing business as or fictitious name filing certificate.

Entity Name and Federal EIN (maybe State EIN) – The bank will require the Federal EIN and may require a state EIN to associate with the account.

 

Minimum Balance

Business bank accounts generally charge businesses a monthly fee unless the account maintains a minimum balance. Fees for the account vary, but the minimum balance is generally between $2500 and $5000.

Establishing Business Credit

Why?

Early in the life of a business, founders generally have to guarantee any loans or lines of credit for a business. Having business credit will allow the business to secure funding without resorting to the credit history of the owners.

 

Form a Business Entity

To obtain a credit profile, a business must have a separate identity from the owners of the business. See our lecture series on choosing and forming a business entity.

 

Obtain a State and Federal EIN

Obtaining an EIN will provide a record of income and tax payments. See our lecture on obtaining an EIN.

 

Establish a Business Bank Account

Opening a bank account will provide a record for payment transactions. See our lecture on obtaining a bank account.

 

Start a Business Credit File

Several credit rating agencies provide business services: Dunn & Bradstreet, Experian, Equifax and TransUnion.

 

Obtain a Line of Credit or Business Credit Card

Obtaining lines of credit or business credit cards demonstrates responsibility. It provides proof of use of funds and payment of debts. Be careful not to open credit accounts too rapidly. This can actually hurt a credit score. Start by developing two or three credit sources. Use these sources regularly and make prompt payment on any debt. Note: The most advantageous type of loan is an unsecured loan. This type of loan may be difficult to obtain early in the life of a business.

Make Timely Payments

Like a personal credit history, businesses must make timely payments on all obligations. Failure to make payments or late payments are recorded and can harm a businesss credit rating.